Retirement is the biggest worry for Danny, 46, and Nicole, 50, and they’re at a critical point in their lives. With their two grown children on their own, the couple is not sure if they’re saving enough and if they’re using the right investments to help them reach their goal of retiring when Danny is 60.
“We envision our retirement as some travel and some volunteer work, possibly even some part-time work if it is work we enjoy and not work that requires a full-time commitment,” said Nicole.
Danny and Nicole, whose names have been changed, have saved $192,000 in 401(k) plans, $22,500 in IRAs, $37,125 in mutual funds, $61,000 in certificates of deposit, $59,000 in savings account and $7,000 in checking.
The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Danny and Nicole determine if they’re on track.
“First they need to focus on how much more they can afford to save for retirement,” Duerr said. “Time is still on their side when it comes to saving for retirement.”
To determine how much extra they can afford to save, they need to take a closer look at their budget. Based on their salaries and expenses, it appears there’s a lot of cash flow that’s unaccounted for. Danny and Nicole should closely track their expenses for a couple of months so they have a true understanding of where their money goes each month.
Duerr said it’s good that both Danny and Nicole plan to work part time in retirement, and the income will help to supplement what they have saved. The main focus, though, should be their current retirement savings.
Danny and Nicole are currently contributing to their 401(k) plans to ensure they receive the maximum company match of 6 percent.
But, Duerr said, they are both eligible to contribute more than twice what they are currently and, because Nicole is 50, she can contribute an additional $5,500 in “catch-up” contributions.
“Saving a significant amount more in their 401(k)s annually may not be an easy thing to do, but it is something they need to seriously think about,” Duerr said.
If Danny and Nicole continue saving 6 percent of their salaries, with a company match of 6 percent until they are both 60, Danny’s balance will be $461,000 and Nicole’s, $447,000, assuming a 5 percent rate of return.
Raising their contributions will make a big difference to their balance sheets come retirement. If they increase their contributions to $10,000 a year, their balances would be $518,000 and $492,000 respectively, assuming a 5 percent rate of return, Duerr said. If they can boost contributions to the max — $16,500 in 2010 — with the company match, their accounts would be worth $650,000 and $595,000, again assuming a 5 percent rate of return. An increase in savings rates will make a substantial impact on their cash flow at retirement.
Based on today’s savings rates, if they withdraw 4 percent a year, they’d have approximately $36,000 of 401(k) income a year. If they instead contributed the maximum amounts until age 60, assuming a 4 percent withdrawal rate, they would be able to withdraw approximately $50,000 a year.
Danny and Nicole say they’re relatively conservative investors. As a result, their asset allocation is primarily made up of U.S. equities, bonds and money market funds. Adding more asset classes won’t make their portfolio riskier, but more evenly balanced. Duerr said they should consider adding mid-cap, small-cap and international investments.
There’s another large area of imbalance in their retirement portfolios: They own individual stocks which make up almost one-third of their portfolios. They believe they are conservatively invested but, Duerr said, having a large portion of their portfolios in two securities — one being the stock of the company they both work for — gives them far more risk than they should take on.
“All too often people believe too much in their employer and take on more risk than they should,” he said. “There have been too many companies that have faced hard times over the last decade and many employees have seen their retirement accounts suffer as a result.”
Duerr also examined the couple’s life insurance policies. They each have a $300,000 whole life policy at a cost of $9,000 a year. Given that their children are grown and their mortgage is paid off, they should ask themselves if these policies still make sense.
“They should be able to purchase term policies for the same, if not a higher, face amount and be able to save a significant amount on insurance premiums,” Duerr said. “This savings could then be set aside for retirement.”